by Ron Chernow
Frank Rockefeller never fared well in the business world and spread dissension in the Standard ranks. He was jealous of the power wielded by the office head, Colonel Thompson, the former Confederate colonel. (That Frank had been wounded on the Union side couldn’t have helped.) For one tumultuous year, Frank and Thompson waged their own civil war, Frank steaming at duties Thompson assigned to him. In confidential letters to John D., Frank tried to smear Thompson as a power-mad executive, feathering his nest at the company’s expense. As Standard Oil angled for a natural-gas charter in Cleveland, Frank wrote privately that Thompson “is intending to so pull wires and spend money . . . in such a way as if possible, to wield such an influence as would result in his own personal aggrandizement politically.” 34 Thompson, a tough, wily customer, could have outmaneuvered Frank, but he wisely sensed the perils of beating the president’s brother and withdrew from the field of battle. Instead, he moved to New York and chaired the domestic-trade committee at 26 Broadway, leaving Frank outwardly in charge in Cleveland.
In February 1887, the trust further downgraded Cleveland in the Standard Oil hierarchy, reducing it to a shipping and manufacturing center, with actual business decisions taken in New York. In other words, high-level orders would now emanate from Thompson’s committee. As Frank wrote John from Cleveland, “When I returned to the city Monday morning I found the people throughout the entire building in a fearfully demoralized state of mind, and was besieged more or less for several days by different ones—all anxious to know what their fate was to be—the general impression prevailing that a majority of them would lose their situations, business going to New York.”35
Irritated by Frank’s griping, John was soon coldly writing “Dear Sir” letters to him and signing them, “John D. Rockefeller, President.” Gradually, Frank was shunted aside by Feargus Squire, nominally secretary of Standard of Ohio and lower than Frank on the organization chart, but the real boss of the office. It seems that Frank alienated virtually everyone in the building and was increasingly ostracized. An official history of Standard of Ohio describes the denouement: “The vice-president’s interest in what was going on, seldom noticeable, diminished as time went by, and there were those who came to regard him as a millstone around the neck of a more talented man. Many thought he was being retained because his name was Rockefeller—an opinion which a hundred contrary pronouncements from 26 Broadway would not have altered.”36
The four Rockefeller children strike a pose in 1885. Left to right: Alta, Bessie, Edith, and John, Jr. (Courtesy of the Rockefeller Archive Center)
CHAPTER 16
A Matter of Trust
For twenty-five years after Drake’s discovery, no major oil field was discovered in America beyond the Pennsylvania borders, so that it was never clear whether Rockefeller’s empire rested on terra firma or quicksand. When somebody told John D. Archbold in 1885 that traces of oil had been found in what later became Oklahoma, he reacted with incredulity. “Are you crazy, man?” he scoffed. “Why, I’ll drink every gallon of oil produced west of the Mississippi!”1 Though small amounts of crude were being pumped in California and Kentucky, one expert solemnly assured Archbold that the chances of finding another bonanza on the scale of the Bradford field were one in a hundred; in alarm, Archbold liquidated some of his Standard Oil shares. Writing to Rockefeller that September, he mused gloomily that “we have opened nothing of importance in the way of production this summer, and next winter must see a great reduction in the old Bradford and Allegheny fields, from which the bulk of the production is yet obtained.”2 The American oil business seemed headed toward premature extinction.
Rockefeller and his associates had long been haunted by two antithetical nightmares: Either the oil would dry up, starving their network of pipelines and refineries, or they would drown in a sea of cheap oil that would drag prices below their overhead costs. At one panicky executive-committee meeting in the early 1880s, it was even suggested that Standard Oil should exit the business and enter something more stable. After listening quietly to such defeatist talk, Rockefeller stood up, pointed skyward, and intoned, “The Lord will provide.”3 Rockefeller tended to see a heavenly design in all things and was convinced that the Almighty had buried the oil in the earth for a purpose.
In retrospect, it seems peculiar that Standard Oil—omnipotent in refining, transportation, and distribution—owned just four producing properties in the early 1880s. Thousands of Standard Oil employees had never seen a well. Why had Rockefeller not taken over the oil fields and completed his mastery of the industry? One must recall that in its formative years, the business suffered more gluts than shortages, giving Rockefeller the option of sitting back and watching producers slash prices in chaotic competition. He had long profited from the juxtaposition of cooperation in refining and competition in production. Political tact also dictated that he tread warily. As late as 1884, Archbold vigorously opposed any move into production as overly provocative: “I think if the name of the Standard Oil Co. were to go forth coupled with the movement, it would make new food for demagogues, politicians, papers, and howlers of all descriptions.”4
Why, then, did a radical policy shift occur within a year or two? Partly, this derived from the trust’s entry into natural gas, which put it, willy-nilly, in the drilling business, but the more compelling reason was that Standard Oil had built up a huge global machinery with a ravenous thirst for crude oil. As the Pennsylvania fields were depleted, Rockefeller feared that he might have to turn to Russian crude, and it seemed certain that the Russians would exploit their control of the oil fields to weaken or even eradicate Standard Oil. Already by 1884, an anxious Rockefeller was badgering associates to create a crude-oil reserve beyond their immediate needs, and he invested in some West Virginia producing properties. As he warned a skeptical colleague, “We must keep in sight always a large volume of the raw material, and better that this stock be somewhat excessive than run the risk of Russian competition shutting us out.”5
Then came a turning point almost as momentous as Drake’s discovery. In May 1885, a group of small operators, searching for natural gas in northwest Ohio, tapped a pocket of oil instead. This threw the industry into a wild uproar, providing incontestable proof that substantial deposits existed in the United States outside of Pennsylvania. By year’s end, more than 250 derricks had sprouted around the town of Lima, spilling across the border into Indiana. Yet the cheering was restrained, for the chemical content of Lima crude had intractable quality problems that threatened to destroy its value. For one thing, it contained less kerosene than Pennsylvania petroleum and that kerosene spread a film over lamps. Even more troublesome, its high sulfur content corroded machinery and gave off a deadly smell. (Pennsylvania crude had a paraffin base.) As one newspaper put it, “The chief fault found with Ohio stuff is the fact that it smells like a stack of polecats and is only worth forty cents a barrel.”6 For a household item, this stench was a fatal drawback, and the standard practice of cleansing crude with sulfuric acid was not enough to disinfect it.
It was, arguably, Rockefeller’s supreme inspiration that he believed in the Ohio-Indiana fields—one of those flashes of vatic power that made him a business legend. As he said, “It seemed to us impossible that this great product had come to the surface to be wasted and thrown away; so we went on experimenting with every process to utilize it.”7 To solve the problem, in July 1886 Rockefeller imported a distinguished, German-born chemist named Herman Frasch and gave him simple marching orders: Banish the odor from Lima crude and turn it into a marketable commodity. While Frasch burrowed away at this problem, the Standard Oil board faced an excruciating dilemma: Should they assume Frasch would succeed and buy up huge leases along the Ohio-Indiana border; or should they wait until Frasch had finished and risk losing the choicest properties?
Despite his prudent style, Rockefeller could exhibit visionary daring and undertake colossal gambles. He was now prepared to wager an enormous amount on Lima oil, a decision that test
ed his belief in management by consensus, for a conservative board clique headed by Charles Pratt obstinately resisted him. Rockefeller had always derided Pratt as weak-kneed and fainthearted, a “small man” who contributed little beyond the marketing area. 8 Yet far from imposing his will, Rockefeller tolerated prolonged debate about Lima crude, producing “a continual wrangle in the Board of the Standard Oil Company, day by day, month by month, year after year.” 9
A thin man with a Vandyke, active in his Baptist church, Pratt shared Rockefeller’s puritanical style. “Waste neither time nor money” was his favorite motto.10 A donor to many causes, Pratt was the first president and principal donor of the Adelphia Academy in Brooklyn and later bequeathed several million dollars to found the Pratt Institute, which offered classes in manual trades, the arts, and domestic economy. Despite their similarities, Pratt was a timid executive who lacked Rockefeller’s audacity and often felt slighted by him. He now turned the Lima debate into a referendum on his own business acumen. At every meeting, when Rockefeller proposed purchasing Ohio leases, Pratt and his faction objected. As Rockefeller said in mockery, they “held up their hands in holy horror.”11 Finally, to break the deadlock, Rockefeller took an incalculable gamble. At one board meeting, after Rockefeller made his standard pitch for a Lima investment, Pratt lost his temper, threw back his head in agitation, and shouted “No!” Whereupon Rockefeller replied coolly, “I will build this improvement out of my own funds and underwrite it for two years.” He astonished his colleagues by pledging $3 million—about $47 million in 1996 dollars. “At the end of that time if it is a success the company can reimburse me. If it is a failure, I will take the loss.”12 Whether impressed by Rockefeller’s unflinching resolve or realizing that he had lost, Pratt capitulated. “If that’s the way you feel about it, we’ll go it together,” he replied. “I guess I can take the risk if you can.”13
Standard Oil spent millions of dollars to buy oil properties, build tank cars, and construct pipelines in Lima. Daniel O’Day had never seen an oil field that he didn’t want to crosshatch with pipes, and when the trust started the Buckeye Pipe Lines Company to gather Lima crude in March 1886, he informed producers with more force than subtlety that they had to give Buckeye all their crude. Any driller who struck oil was accosted on the spot by one of O’Day’s determined agents. As he told Rockefeller, “I believe it is for the best interest of our company that as soon as we learn of any new development either oil or gas that we have a man there at once and have him stay there ready to take hold of anything that may turn up.” 14 An irresistible force, O’Day soon cornered 85 percent of the Lima oil. Even though no market yet existed for the “skunk oil,” the trust bought every single barrel offered by producers and by 1888 had over forty million barrels in storage tanks. By that point, the foul-smelling fluid sold for fifteen cents per barrel.
In taking his gamble, Rockefeller hadn’t entirely trusted to the Lord and the Standard Oil chemists and was casting about for a new application for the malodorous oil. He found the answer in fuel oil. The trust sent out teams of salesmen and technicians to persuade railroads to burn oil instead of coal in their locomotives and to suggest to hotels, factories, and warehouses that they switch from coal furnaces to oil burners. Although this effort flourished, the resulting business still didn’t equal the scale of the kerosene industry and only marginally diminished the fierce pressure weighing on Herman Frasch in his laboratory.
Nicknamed the Wild Dutchman, the vainglorious Frasch conformed to the stereotype of the eccentric scientist. A short man of explosive temper, he had immigrated to the United States after the Civil War. In the mid-1870s, Rockefeller brought him to Cleveland, where he did splendid work with paraffin, producing a new wax for British candle makers and a new ingredient for Cleveland’s chewing-gum magnate, William J. White. Afterward, Frasch set up shop in Canada and patented a process for eliminating sulfur from sour Ontario oils. Since the Ontario fields lay across Lake Erie from northwest Ohio, Rockefeller must have assumed a high likelihood of success when he hired Frasch to work on a kindred problem. By February 1887, Frasch had achieved partial success with Lima crude, introducing copper oxides to remove the sulfur. Then came the big breakthrough of October 13, 1888, when Feargus Squire wired Rockefeller with the historic news he had eagerly awaited for two years: “We are pleased to advise you that by experimenting with the Frasch process we have succeeded in producing a merchantable oil.”15
Frasch’s feat did more than vindicate Rockefeller’s reputation as an uncanny prophet of industry trends. Had Frasch not figured out how to use Lima crude, a critical shortage of American oil would have arisen between the depletion of western Pennsylvania crude and the Texas and Kansas booms of the early 1900s. For fifteen years, Frasch’s patents furnished dazzling profits for Rockefeller and Standard Oil and boosted the status of research scientists throughout the industry. The original oilmen were self-made roughnecks, biased against science and prone to operate by intuition, whereas Rockefeller brought a rational spirit to the business, and this counted among his greatest contributions. As the philosopher Alfred North Whitehead said, “The greatest invention of the nineteenth century was the invention of the method of invention.”16 When Frasch cracked the riddle of Lima crude, he was probably the only trained petroleum chemist in the United States. By the time Rockefeller retired, he had a test laboratory in every refinery and even one on the top floor of 26 Broadway. This was yet another way in which he converted Standard Oil into a prototype of the modern industrial organization, its progress assured by the steady application of science.
Once Rockefeller had an insight, it often gripped him with the irresistible force of an epiphany, and he now decided that Standard Oil must guarantee its crude-oil supply. After Frasch certified the worth of Lima crude, the trust moved into oil production with all the formidable resources within its reach. In 1889, a production committee was formed under the aegis of John D. Archbold, and it spent money at such a torrid pace that within two years it had disbursed $22 million—a figure that strained even Standard Oil’s budget, prompting more anguished howls from Charles Pratt. Rockefeller’s faith was vindicated, however, as the Ohio-Indiana field overtook the waning Pennsylvania industry and became the country’s crude-oil leader in the 1890s.
Rejuvenated by Lima, Rockefeller embarked on a buying binge such as the industry had never seen. Swallowing up Union Oil and three other big producing firms in 1890, he took over three hundred thousand acres of Pennsylvania and West Virginia—huge chunks of acreage that encompassed whole counties. The most feared man in the Oil Regions now became their dominant landlord and producer. “Hitherto the attention of the big Octopus has been largely directed toward crushing out all opposition in the refining of oil,” noted one agitated newspaper. “This latest deal shows that it has started to crush out the producers of the crude oil and obtain control of their property.” 17 By 1891, Rockefeller had gained control of a majority of the Lima fields and a quarter of American oil production. (The trust’s share of American crude production peaked at 33 percent in 1898.) By narrowing the range of competition in oil production, the move hastened the day of political reckoning for Standard Oil.
In future years, the discovery of new fields both at home and abroad provided openings for upstart competitors, but the trust’s swift, complete control of the Lima field gave it unchallenged control of American oil in the 1890s. The only major competitor spawned by the new territory was the Sun Oil Company, started by J. N. Pew in 1886. In spring 1891, Archbold visited Lima, cast a proprietary eye over oil fields stretching more than one hundred miles, and gloated in a letter to Rockefeller, “We undoubtedly have, as the case stands, well in reserve the greater part of the defined territory, and we will certainly be able to produce oil in the Ohio field more cheaply than anybody else, owning, as we do, great bodies of territories which we can drill judiciously.”18 Now that Rockefeller had scored such a gratifying triumph in production, he instructed Archbold to grab anything
that could still turn a profit with crude at fifty cents a barrel. “If so would buy all we can get,” he wired.19 In this rush into exploration and production, Rockefeller created the model for the vertically integrated oil giants that would straddle the globe in the twentieth century.
The discovery of oil in Ohio radically redrew the map of the Standard universe, for it was senseless to ship crude oil to eastern refineries only to ship kerosene back to markets in the Midwest and Far West. In 1886, even before Frasch had completed his work, O’Day scouted northwest Ohio for an appropriate refinery site and chose the charming town of Lima itself, which was served by four railroads. The emergence of the giant Lima refinery accelerated the demise of Cleveland and Pittsburgh as refining centers, and by 1896 Standard Oil phased out its largest Cleveland refinery.
The Lima refinery was a mere preamble to the main event in the Midwest. In June 1889, the trust organized Standard Oil of Indiana, which would build America’s premier oil refinery at Whiting, Indiana, seventeen miles from downtown Chicago. During his 1891 tour, Archbold, trembling at the magnitude of this undertaking, told Rockefeller that the plant’s ability to process 36,000 barrels of crude oil daily struck him as “almost impossible to comprehend.”20 The refinery remained a wonder of world oil for many years. At Whiting, Dr. William M. Burton produced his revolutionary discovery of how to “crack” petroleum, vastly increasing its yield of gasoline—an essential precondition of the auto age.